Estate Taxes Cause Some to Plan their 2010 death.
Recently the AP press reported, U.S. Rep. Cynthia Lummis says her constituents are planning to die just to avoid estate taxes.[1] Currently, there is no estate tax for individuals who pass away in the year 2010. However, if legislators do not act quickly then the estate tax will revert back to a one million dollar exclusion with a 55% top rate. Many had speculated with recent current events that Congress would not be able to pass any estate tax legislation prior to the November elections. Now that the November elections are finished, it is hopeful that some guidance will be given to the future of estate taxes.
Sometimes the Estate Tax is nicknamed the Death Tax. In reality the tax is imposed on the inheritance of wealth. For much of the country a one million dollar exclusion is generally enough to exclude their inheritances from being taxed. However, in the Silicon Valley area where detached single family homes are nearly a million dollars this exclusion can be used up rather quickly.
Bay Area Estate Value Much Higher then Average
Take for example, an estate valued at $1.5 million dollars. Although mere mention of the word million suggests this is not the type of estate that affects the majority of the population. It is actually very common in the Bay Area. Home values in the Bay Area are much higher than national average values. In a recent report, Cupertino, CA median home value is over $1,000,000.00. The median home value in Sunnyvale, CA is reportedly over $750,000.00. Since the value of a home is much more in California the one million dollar exclusion does not allow for much of the estates to transfer without tax.
Practical Calculation How Estate Tax is Applied
To calculate the Estate Tax on $1.5 million dollar estate, we must examine the Estate Tax Tables below.
| Estate Tax Rates Table |
| Subject to Exemptions and Maximum Tax Rates Table |
| Estate Amount Exceeding: |
Up to: |
Is taxed at a rate of: |
| $1,000,000 |
$1,250,000 |
41% |
| $1,250,000 |
$1,500,000 |
43% |
| $1,500,000 |
$2,000,000 |
45% |
| $2,000,000 |
$2,500,000 |
49% |
| $2,500,000 |
$3,000,000 |
50% |
| $3,000,000 |
$10,000,000 |
55% |
| $10,000,000+ |
$17,184,000 |
60% |
| $17,184,000+ |
|
55% |
|
|
|
| Exemptions and Maximum Tax Rates |
| Year |
Estate Tax Exemption |
Highest Rate |
| 2003 |
$1 million |
49% |
| 2004 |
$1.5 million |
48% |
| 2005 |
$1.5 million |
47% |
| 2006 |
$2 million |
46% |
| 2007 |
$2 million |
45% |
| 2008 |
$2 million |
45% |
| 2009 |
$3.5 million |
45% |
| 2010 |
N/A (taxes eliminated) |
0% |
| 2011 |
$1 million |
60% |
In 2010, the estate would incur no estate tax and the inheritance would be the full 1,500,000.00.
In 2011, the estate would have a $1,000,000.00 exclusion, and the balance would be taxed. The table below shows my tax calculation on a $1,500,000.00 estate in the year 2011.
| Tax Rate |
Calculation |
Tax |
Total Inherited |
| 0% |
1,000,000 exclusion |
|
$ 1,000,000.00 |
| $1,000,000-$1,250,000 @ 41% |
41% of $250,000.00 |
$ 102,500.00 |
$ 147,500.00 |
| $1,250,000-$1,500,000 @ 43% |
43% of $250,000.00 |
$ 107,500.00 |
$ 142,500.00 |
| |
|
$ 210,000.00 |
$ 1,290,000.00 |
In 2010, the estate would be free of estate tax but in 2011 the estate tax would be $210,000.00. Estates of even higher values would have even more drastic tax differences in 2011. Simply put a 2 million dollar estate would have to pay nearly a million dollars in estate taxes.
This is only a theoretical computation and many people are hopeful that Congress will pass new estate tax legislation, while others argue that estate tax relief is not an important issue. Although there is no way to be certain if Congress will act, many believe that the only certain thing in life is death and taxes. However, no one says that you have to pay the maximum tax rate. In fact, each individual is permitted a $13,000.00 gift tax exemption per year. That is only one of the many ways an attorney can assist in your estate planning.
For more information about Estate Planning, please contact us. Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may include legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.
[1] CHEYENNE, Wyo. (AP) — U.S. Rep. Cynthia Lummis says some of her Wyoming constituents are so worried about the reinstatement of federal estate taxes that they plan to discontinue dialysis and other life-extending medical treatments so they can die before Dec. 31. The Associated Press: US rep.: Estate tax rise has some planning death, http://www.google.com/hostednews/ap/article/ALeqM5iE6x5QNARlHHqT8EKF-KUYWflVpg?docId=01c363eeccd542fe9dc9f9742699686b (last visited Nov. 4, 2010).
